##### Table of Contents



FORM 10-Q
 UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarter ended June 30, 2008
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 For the transition period from  to
 Commission file number 033-43007
 TERRA NITROGEN COMPANY, L.P.
  Delaware
    
    73-1389684(State or other jurisdiction of
    
    (I.R.S. Employer Identification No.)incorporation or organization)Terra CentrePO Box 6000, 600 Fourth StreetSioux City, Iowa
    
    51102-6000(Address of principal executive office)
    
    (Zip Code)
 Registrants telephone number:
(712) 277-1340
 Indicate by check mark whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
 þ Yes o No
 Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer or a smaller reporting company. See the definitions of large
accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act. (Check one):
 o Large accelerated filer
    
    þ Accelerated filer
    
    o Non-accelerated filer
    
    o Smaller reporting company(Do not check if a smaller reporting company)
 Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act). o Yes þ No
 At the close of business on July 25, 2008 there were 18,501,576 Common Units.




---



##### 



TABLE OF CONTENTS
 Part I  FINANCIAL INFORMATIONItem 1. Financial StatementsConsolidated Balance Sheets
    
    
    3Consolidated Statements of Operations
    
    
    4Consolidated Statements of Cash Flows
    
    
    5Consolidated Statements of Partners Capital
    
    
    6Notes to Consolidated Financial Statements
    
    
    7Item 2. Management Discussion and Analysis of Financial Condition and
Results of Operations
    
    
    16Item 3. Quantitative and Qualitative Disclosures about Market Risk
    
    
    21Item 4. Controls and Procedures
    
    
    21Part II  OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    23Item 1A. Risk Factors
    
    
    23Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    23Item 3. Defaults upon Senior Securities
    
    
    23Item 4. Submission of Matters to a Vote of Security Holders
    
    
    23Item 5. Other Information
    
    
    23Item 6. Exhibits
    
    
    24Exhibit 31.1Exhibit 31.2Exhibit 32
   2




---



##### Table of Contents



PART I. FINANCIAL INFORMATION
 
 ITEM 1. FINANCIAL STATEMENTS
 TERRA NITROGEN COMPANY, L.P.
 
 CONSOLIDATED BALANCE SHEETS   unaudited
 June 30,
    
    
    December 31,
    
    
    June 30,2008
    
    
    2007
    
    
    2007ASSETSCurrent assets:Cash and cash equivalents
    
    $
    161,320
    
    
    $
    246,140
    
    
    $
    80,732Demand deposits with affiliate
    
    
    2,639
    
    
    
    
    
    
    
    5,332Accounts receivable
    
    
    50,700
    
    
    
    49,635
    
    
    
    49,999Inventory
    
    
    36,960
    
    
    
    19,343
    
    
    
    22,542Prepaid expenses and other current assets
    
    
    42,505
    
    
    
    4,906
    
    
    
    2,471Total current assets
    
    
    294,124
    
    
    
    320,024
    
    
    
    161,076Property, plant and equipment, net
    
    
    70,374
    
    
    
    71,289
    
    
    
    72,250Other assets
    
    
    15,471
    
    
    
    22,473
    
    
    
    13,749Total assets
    
    $
    379,969
    
    
    $
    413,786
    
    
    $
    247,075LIABILITIES AND PARTNERS CAPITALCurrent liabilities:Accounts payable and accrued liabilities
    
    $
    52,719
    
    
    $
    49,825
    
    
    $
    47,481Customer prepayments
    
    
    41,471
    
    
    
    154,644
    
    
    
    16,846Total current liabilities
    
    
    94,190
    
    
    
    204,469
    
    
    
    64,327Other long-term liabilities
    
    
    1,220
    
    
    
    2,218
    
    
    
    1,815Total liabilities
    
    
    95,410
    
    
    
    206,687
    
    
    
    66,142Partners capital:Limited partners interests, 18,502 Common Units
and 184 Class B Common Units authorized and
outstanding
    
    
    208,971
    
    
    
    221,726
    
    
    
    204,775General partners interest
    
    
    43,353
    
    
    
    (9,928
    )
    
    
    (10,089
    )Accumulated other comprehensive income (loss)
    
    
    32,235
    
    
    
    (4,699
    )
    
    
    (13,753
    )Total partners capital
    
    
    284,559
    
    
    
    207,099
    
    
    
    180,933Total liabilities and partners capital
    
    $
    379,969
    
    
    $
    413,786
    
    
    $
    247,075
   3




---



##### Table of Contents



TERRA NITROGEN COMPANY, L.P.
 
 CONSOLIDATED STATEMENTS OF OPERATIONS   (unaudited)
 Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Revenues
    
    $
    256,792
    
    
    $
    177,158
    
    
    $
    431,045
    
    
    $
    305,010Other
    
    
    (121
    )
    
    
    282
    
    
    
    158
    
    
    
    587Total revenues
    
    
    256,671
    
    
    
    177,440
    
    
    
    431,203
    
    
    
    305,597Cost of goods sold
    
    
    121,861
    
    
    
    114,111
    
    
    
    213,832
    
    
    
    204,881Gross profit
    
    
    134,810
    
    
    
    63,329
    
    
    
    217,371
    
    
    
    100,716Operating expenses
    
    
    6,113
    
    
    
    7,470
    
    
    
    9,637
    
    
    
    10,648Operating income
    
    
    128,697
    
    
    
    55,859
    
    
    
    207,734
    
    
    
    90,068Interest expense
    
    
    (82
    )
    
    
    (114
    )
    
    
    (163
    )
    
    
    (226
    )Interest income
    
    
    1,540
    
    
    
    1,312
    
    
    
    4,180
    
    
    
    2,545Net income
    
    $
    130,155
    
    
    $
    57,057
    
    
    $
    211,751
    
    
    $
    92,387Net income allocable to
Common Units
    
    $
    74,185
    
    
    $
    55,916
    
    
    $
    146,889
    
    
    $
    90,540Net income per Common Unit
    
    $
    4.01
    
    
    $
    3.02
    
    
    $
    7.94
    
    
    $
    4.89
   4




---



##### Table of Contents



TERRA NITROGEN COMPANY, L.P.
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS   (unaudited)
 Six Months EndedJune 30,2008
    
    
    2007Operating activities:Net income
    
    $
    211,751
    
    
    $
    92,387Adjustments to reconcile net income to net cash
flows from operating activities:Depreciation and amortization
    
    
    11,530
    
    
    
    7,619Non-cash gain on derivative instruments
    
    
    (4,201
    )
    
    
    (342
    )Changes in operating assets and liabilities:Receivables
    
    
    (1,065
    )
    
    
    (12,323
    )Inventories
    
    
    (17,617
    )
    
    
    167Accounts payable and customer prepayments
    
    
    (104,448
    )
    
    
    (16,188
    )Other assets and liabilities
    
    
    (2,803
    )
    
    
    1,909Net cash flows from operating activities
    
    
    93,147
    
    
    
    73,229Investing activities:Capital expenditures
    
    
    (3,988
    )
    
    
    (2,900
    )Plant turnaround expenditures
    
    
    (115
    )
    
    
    (1,057
    )Change in demand deposits with affiliate
    
    
    (2,639
    )
    
    
    (2,875
    )Net cash flows from investing activities
    
    
    (6,742
    )
    
    
    (6,832
    )Financing activities:Partnership distributions paid
    
    
    (171,225
    )
    
    
    (47,952
    )Net cash flows from financing activities
    
    
    (171,225
    )
    
    
    (47,952
    )Net increase in cash and cash equivalents
    
    
    (84,820
    )
    
    
    18,445Cash and cash equivalents at beginning of year
    
    
    246,140
    
    
    
    62,287Cash and cash equivalents at end of period
    
    $
    161,320
    
    
    $
    80,732Supplemental disclosure of cash flow information:Cash paid during the year for interest
    
    $
    127
    
    
    $
    64
   5




---



##### Table of Contents



TERRA NITROGEN COMPANY, L.P.
 
 CONSOLIDATED STATEMENTS OF PARTNERS CAPITAL   (unaudited)
 AccumulatedClass B
    
    
    General
    
    
    Other
    
    
    TotalCommon
    
    
    Common
    
    
    Partners
    
    
    Comprehensive
    
    
    Partners
    
    
    Comprehensive(in thousands, except for Units)
    
    Units
    
    
    Units
    
    
    Interests
    
    
    Income (Loss)
    
    
    Capital
    
    
    IncomePartners capital at January 1, 2008
    
    $
    221,153
    
    
    $
    573
    
    
    $
    (9,928
    )
    
    $
    (4,699
    )
    
    $
    207,099Net income
    
    
    146,889
    
    
    
    2,065
    
    
    
    62,797
    
    
    
    
    
    
    
    211,751
    
    
    $
    211,751Change in fair value of derivatives
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    36,934
    
    
    
    36,934
    
    
    
    36,934Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    248,685Distributions
    
    
    (160,040
    )
    
    
    (1,669
    )
    
    
    (9,516
    )
    
    
    3⁄4
    
    
    
    (171,225
    )Partners capital at June 30, 2008
    
    $
    208,002
    
    
    $
    969
    
    
    $
    43,353
    
    
    $
    32,235
    
    
    $
    284,559Limited partner units issued and
outstanding June 30, 2008:Common Units
    
    
    
    
    
    
    
    
    
    
    18,501,576Class B Common Units
    
    
    
    
    
    
    
    
    
    
    184,072Total units outstanding at June 30, 2008
    
    
    
    
    
    
    
    
    
    
    18,685,648
 AccumulatedClass B
    
    
    General
    
    
    Other
    
    
    TotalCommon
    
    
    Common
    
    
    Partners
    
    
    Comprehensive
    
    
    Partners
    
    
    Comprehensive(in thousands, except for Units)
    
    Units
    
    
    Units
    
    
    Interests
    
    
    Income (Loss)
    
    
    Capital
    
    
    IncomePartners capital at January 1, 2007
    
    $
    160,837
    
    
    $
    (41
    )
    
    $
    (10,545
    )
    
    $
    (6,179
    )
    
    $
    144,072Net income
    
    
    90,540
    
    
    
    900
    
    
    
    947
    
    
    
    3⁄4
    
    
    
    92,387
    
    
    $
    92,387Change in fair value of derivatives
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (7,574
    )
    
    
    (7,574
    )
    
    
    (7,574
    )Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    84,813Distributions
    
    
    (46,994
    )
    
    
    (467
    )
    
    
    (491
    )
    
    
    
    
    
    
    (47,952
    )Partners capital at June 30, 2007
    
    $
    204,383
    
    
    $
    392
    
    
    $
    (10,089
    )
    
    $
    (13,753
    )
    
    $
    180,933Limited partner units issued and
outstanding at June 30, 2007:Common Units
    
    
    
    
    
    
    
    
    
    
    18,501,576Class B Common Units
    
    
    
    
    
    
    
    
    
    
    184,072Total units outstanding at June 30, 2007
    
    
    
    
    
    
    
    
    
    
    18,685,648
   6




---



##### Table of Contents



TERRA NITROGEN COMPANY, L.P.
 
 Notes to Consolidated Financial Statements (Unaudited)
 1.
    
    Financial Statement PresentationBasis of PresentationThe condensed consolidated financial statements contained herein should be read in conjunction
with the consolidated financial statements and notes thereto contained in the Terra Nitrogen
Company, L.P. (TNCLP, our, we, or us) Annual Report on Form 10-K for the year ended
December 31, 2007. TNCLP and its operating partnership subsidiary, Terra Nitrogen, Limited
Partnership (the Operating Partnership), are referred to herein, collectively, as the
Partnership.The accompanying unaudited condensed consolidated financial statements reflect all adjustments,
which are, in the opinion of management, necessary for the fair statement of the results for
the periods presented. All of these adjustments are of a normal and recurring nature. Results
for the quarter are not necessarily indicative of our future financial results.Derivatives and Financial InstrumentsWe account for derivatives in accordance with Statement of Financial Accounting Standards
(SFAS) No. 133, Accounting for Derivative Instruments and Hedging Activities(SFAS 133),
which requires that derivatives be reported on the balance sheet at fair value and, if the
derivative is not designated as a hedging instrument, changes in fair value must be recognized
in earnings in the period of change. If the derivative is designated as a cash flow hedge and
to the extent such hedge is determined effective, changes in fair value are reported as a
component of accumulated other comprehensive income (loss) in the period of change, and
subsequently recognized in the determination of net income in the period that the offsetting
hedged transaction occurs.Terra Industries Inc. and its subsidiaries (Terra) enter into derivative instruments with
counterparties for our operations. When Terra enters into a derivative instrument for our
operations, we simultaneously enter into a derivative instrument with Terra as the
counterparty. The terms of the derivative instruments between us and Terra are identical to the
terms of the derivative instruments between Terra and Terras counterparty. The types of
derivative instruments entered into include swaps, basis swaps, and options to cap or fix
prices for a portion of our natural gas production requirements. Terra may also enter into
similar derivative instruments to fix or set floor prices for a portion of our nitrogen sales
volumes.Revenue RecognitionRevenue is recognized when persuasive evidence of a transaction exists, delivery has occurred,
the price is fixed or determinable, no obligations remain and collectibility is probable. We
classify any discounts and trade allowances as a reduction in revenue. Gains or losses
associated with settled nitrogen derivative contracts are classified as revenue. We classify
amounts directly or indirectly billed to our customers for shipping and handling as revenue.
  7




---



##### Table of Contents



Cost of Goods SoldThe cost of manufacturing fertilizer products is recorded when the fertilizer products are sold
and revenue is recognized. We classify amounts directly or indirectly billed for delivery of
products to our customers or our terminals as cost of goods sold. Gains and losses on
derivative activities are recognized in cost of goods sold.InventoriesInventories are stated at the lower of average cost or estimated net realizable value. We
perform a monthly analysis of our inventory balances to determine if the carrying amount of
inventories exceeds its net realizable value. The analysis of estimated realizable value is
based on customer orders, market trends and historical pricing. If the carrying amount exceeds
the estimated net realizable value, the carrying amount is reduced to the estimated net
realizable value.Production costs include the cost of direct labor and materials, depreciation and amortization,
and overhead costs related to manufacturing activities. The cost of inventories is determined
using the first-in, first-out method.We estimate a reserve for obsolescence and excess of our materials and supplies inventory.
Inventory is stated net of the reserve.Plant Turnaround CostsCosts incurred for the periodic scheduled maintenance of continuous process production
facilities (plant turnarounds) are deferred and charged to product costs on a straight-line
basis during the period until the next scheduled turnaround, generally two years. These costs
are directly related to and associated with the turnaround to replace or extend the useful life
of worn major equipment and electronic system controls for items such as compressors, heat
exchangers, pumps, valves, catalysts, piping, motors and other items.Impairment of Long-Lived AssetsWe review our long-lived assets for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. If the sum of the
undiscounted future cash flows expected to result from the use of the asset is less than the
carrying amount of the asset, an impairment loss is recognized based on the difference between
the carrying amount and the fair value of the asset.Natural Gas Swaps, Options and Basis SwapsThe estimated fair value of each class of derivatives is based on published referenced prices
and quoted market prices from brokers.
  8




---



##### Table of Contents



Cash and Cash EquivalentsWe classify cash and short-term investments with an original maturity of three months or less
as cash and cash equivalents. Demand deposits with affiliate are not classified in cash and
cash equivalents.Demand Deposits with AffiliateOur cash receipts are generally received by Terra. Cash receipts, net of cash payments made by
Terra, are transferred to us from Terra on a weekly basis. As a result of this cash collection
and distribution arrangement, Terra is a creditor to us.Use of Estimates in Preparation of the Financial StatementsThe preparation of financial statements in conformity with accounting principles generally
accepted in the United States requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those estimates.2.
    
    Agreement of Limited PartnershipWe make quarterly distributions to our partners based on available cash for the quarter as
defined in our Agreement of Limited Partnership. Available Cash is defined generally as all
cash receipts less all cash disbursements, adjusted for changes in certain reserves established
as the General Partner determines in its reasonable discretion to be necessary. We paid
distributions of $171.2 million to our partners in the first six months of 2008 and $47.9
million for the same period in 2007.We receive 99% of the Available Cash from Terra Nitrogen, Limited Partnership (the Operating
Partnership) and 1% is distributed to its General Partner. Cash distributions from the
Operating Partnership generally represent the Operating Partnerships Available Cash from
operations. Our cash distributions are made 99.975% to Common and Class B Common Unitholders
and 0.025% to our General Partner except when cumulative distributions of Available Cash exceed
specified target levels above the Minimum Quarterly Distributions (MQD) of $0.605 per unit.
Under such circumstances, our General Partner is entitled, as an incentive, to larger
percentage interests.
  9




---



##### Table of Contents



On July 24, 2008, we announced a $3.63 distribution to be paid to Common Unit holders in the
2008 third quarter. In the first quarter of 2008, we exceeded the cumulative MQD amounts and
will distribute the Available Cash as summarized in following table:
 Income and Distribution AllocationClass BTarget
    
    
    Target
    
    
    Common
    
    
    Common
    
    
    GeneralLimit
    
    
    Increment
    
    
    Units
    
    
    Units
    
    
    Partner
    
    
    TotalMinimum Quarterly Distribution
    
    $
    0.605
    
    
    
    0.605
    
    
    
    98.990
    %
    
    
    0.985
    %
    
    
    0.025
    %
    
    
    100.000
    %First Target
    
    
    0.715
    
    
    
    0.110
    
    
    
    98.990
    %
    
    
    0.985
    %
    
    
    0.025
    %
    
    
    100.000
    %Second Target
    
    
    0.825
    
    
    
    0.110
    
    
    
    85.859
    %
    
    
    0.985
    %
    
    
    13.156
    %
    
    
    100.000
    %Third Target
    
    
    1.045
    
    
    
    0.220
    
    
    
    75.758
    %
    
    
    0.985
    %
    
    
    23.257
    %
    
    
    100.000
    %Final Target and Beyond
    
    $
    1.045
    
    
    
    
    
    
    
    50.505
    %
    
    
    0.985
    %
    
    
    48.510
    %
    
    
    100.000
    %
 The General Partner is required to remit the majority of cash distributions it receives from
the Partnership in excess of its 1% Partnership equity interest to an affiliated company.At June 30, 2008, the General Partner and its affiliates owned 75.3% of our outstanding units.
When less than 25% of the issued and outstanding units are held by non-affiliates of the
General Partner, we, at the General Partners sole discretion, may call, or assign to the
General Partner or its affiliates, our right to acquire all such outstanding units held by
non-affiliated persons. If the General Partner elects to acquire all outstanding units, we are
required to give at least 30 but not more than 60 days notice of our decision to purchase the
outstanding units. The purchase price per unit will be the greater of 1) the average of the
previous 20 trading days closing prices as of the date five days before the purchase is
announced and 2) the highest price paid by the General Partner or any of its affiliates for any
unit within the 90 days preceding the date the purchase is announced. Additional purchases of
common units by the General Partner may be restricted under the terms of Terras bank credit
agreement as described therein.3.
    
    Net Income per Common UnitBasic and diluted income per Common Unit is based on the weighted-average number of Common
Units outstanding during the period. The following table provides a reconciliation for basic
and diluted income per Common Unit for the three-and six-month periods ended June 30, 2008 and
2007:
 Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,(in thousands, except per-unit amounts)
    
    2008
    
    
    2007
    
    
    2008
    
    
    2007Basic income per Common Unit:Net income allocable to Common Unit
class
    
    $
    74,185
    
    
    $
    55,916
    
    
    $
    146,889
    
    
    $
    90,540Weighted average units outstanding
    
    
    18,502
    
    
    
    18,502
    
    
    
    18,502
    
    
    
    18,502Net income per Common Unit
    
    $
    4.01
    
    
    $
    3.02
    
    
    $
    7.94
    
    
    $
    4.89
 There were no dilutive Common Units outstanding for the three- and six-month periods ended June
30, 2008 and 2007.
  10




---



##### Table of Contents



4.
    
    InventoriesInventories consisted of the following:
 June 30,
    
    
    December 31,
    
    
    June 30,(in thousands)
    
    2008
    
    
    2007
    
    
    2007Materials and supplies
    
    $
    9,038
    
    
    $
    8,231
    
    
    $
    7,494Finished goods
    
    
    27,922
    
    
    
    11,112
    
    
    
    15,048Total
    
    $
    36,960
    
    
    $
    19,343
    
    
    $
    22,542
 Inventory is valued at actual first in, first out cost. Costs include raw materials, labor and
overhead.5.
    
    Derivative Financial InstrumentsWe manage risk using derivative financial instruments for changes in natural gas supply prices
and changes in nitrogen prices. Derivative financial instruments have credit risk and market
risk.Terra enters into derivative instruments with counterparties for our operations. When Terra
enters into a derivative instrument for our operations, we simultaneously enter into a
derivative instrument with Terra as the counterparty. The terms of the derivative instruments
between us and Terra are identical to the terms of the derivative instruments between Terra and
Terras counterparty.We classify a derivative financial instrument as a hedge if all of the following conditions are
met:
 1.
    
    The item to be hedged must expose us to currency or price risk.2.
    
    It must be probable that the results of the hedge position substantially offset
the effects of currency or price changes on the hedged item (e.g., there is a high
correlation between the hedge position and changes in market value of the hedge item).3.
    
    The derivative financial instrument must be designated as a hedge of the item
at the inception of the hedge.
 Natural gas supplies to meet production requirements at our production facilities are purchased
at market prices. Natural gas market prices are volatile and we effectively hedge a portion of
our natural gas production requirements and inventory through the use of swaps, basis swaps and
options. These contracts reference physical natural gas prices or approximate NYMEX futures
contract prices. Contract physical prices are frequently based on prices at the Henry Hub in
Louisiana, the most common and financially liquid location of reference for financial
derivatives related to natural gas. However, natural gas supplies for our production facilities
are purchased at locations other than Henry Hub, which often creates a location basis
differential between the contract price and the physical price of natural gas. Accordingly, the
use of financial derivatives may not exactly offset the changes in the price of physical gas.
The contracts are traded in months forward and settlement dates are scheduled to coincide with
gas purchases during that future period.
  11




---



##### Table of Contents



A swap is a contract between us and a third party to exchange cash based on a designated price.
Option contracts give the holder the right to either own or sell a futures or swap contract.
The option contracts require initial premium payments ranging from 2% to 5% of contract value.
Basis swap contracts require payments to or from us for the amount, if any, that monthly
published gas prices from the source specified in the contract differ from the prices of a
NYMEX natural gas futures during a specified period. There are no initial cash requirements
related to the swap and basis swap agreements.The following summarizes the position of open natural gas derivative contracts at June 30,
2008, December 31, 2007 and June 30, 2007:
 Other
    
    
    AccruedCurrent
    
    
    Current
    
    
    Net(in thousands)
    
    Assets
    
    
    Liabilities
    
    
    Asset (Liability)June 30, 2008
    
    $
    42,425
    
    
    $
    (5,503
    )
    
    $
    36,922December 31, 2007
    
    $
    3,101
    
    
    $
    (7,959
    )
    
    $
    (4,858
    )June 30, 2007
    
    $
    1,806
    
    
    $
    (14,898
    )
    
    $
    (13,092
    )
 Certain derivatives outstanding at June 30, 2008 and 2007, which settled during July 2008 and
2007, respectively, are included in the position of open natural gas derivatives in the table
above. The July 2008 derivatives settled for an approximate $7.4 million gain as compared to
the July 2007 derivatives which settled for an approximate $2.6 million loss. All open
derivatives will settle during the next 12 months.We determined that certain derivative contracts were ineffective hedges for accounting purposes
and recorded a credit of $4.1 million and $0.7 million to cost of sales for the six-month
periods ending June 30, 2008 and 2007, respectively.The effective portion of gains and losses on settlement of these contracts that qualify for
hedge treatment are carried as accumulated other comprehensive income (loss) and are credited
or charged to cost of sales in the month in which the hedged transaction settles. Gains and
losses on the contracts that do not qualify for hedge treatment are credited or charged to cost
of sales based on the positions fair value. The risk and reward of outstanding natural gas
positions are directly related to increases or decreases in natural gas prices in relation to
the underlying NYMEX natural gas contract prices.The activity related to accumulated other comprehensive income (loss) for the three-month
periods ended June 30, 2008 and 2007 is:
 (in thousands)
    
    2008
    
    
    2007Beginning accumulated gain
    
    $
    14,451
    
    
    $
    13Reclassification into earnings
    
    
    (19,744
    )
    
    
    241Net change associated with current period hedging transactions
    
    
    37,528
    
    
    
    (14,007
    )Ending accumulated gain
    
    $
    32,235
    
    
    $
    (13,753
    )
  12




---



##### Table of Contents



The activity related to accumulated other comprehensive income (loss) for the six-month periods
ended June 30, 2008 and 2007 is:
 (in thousands)
    
    2008
    
    
    2007Beginning accumulated loss
    
    $
    (4,699
    )
    
    $
    (6,179
    )Reclassification into earnings
    
    
    (22,247
    )
    
    
    282Net change associated with current period hedging transactions
    
    
    59,181
    
    
    
    (7,856
    )Ending accumulated gain
    
    $
    32,235
    
    
    $
    (13,753
    )
 Approximately $32.2 million of the net accumulated gain at June 30, 2008 will be reclassified
into earnings during the next twelve months as compared to $13.8 million of the net accumulated
loss at June 30, 2007.
 At times, we also use forward derivative instruments to fix or set floor prices for a portion
of our nitrogen sales volumes. At June 30, 2008, we had no open contracts covering nitrogen
solutions. When outstanding, the nitrogen solution contracts do not qualify for hedge treatment
due to inadequate trading history to demonstrate effectiveness. Consequently, these contracts
are marked-to-market and unrealized gains or losses are reflected in revenue in the statement
of operations. For the three- and six-month periods ending June 30, 2008, there were no gains
or losses on nitrogen forward derivative instruments. For the three- and six-month periods
ending June 30, 2007, we recognized a loss of $1.0 million and $1.9 million, respectively, on
nitrogen forward derivative instruments.
 6.
    
    Fair Value Measurements
 On January 1, 2008, we adopted SFAS No. 157, Fair Value Measurements(SFAS 157), which, among
other things, requires enhanced disclosure assets and liabilities measured and reported at fair
value. In February 2008, the FASB issued FASB Staff Position No. 157-2, Effective Date of FASB
Statement No. 157,which delayed for one year the applicability of SFAS 157s fair-value
measurements to certain nonfinancial assets and liabilities. We adopted SFAS 157 in 2008,
except as it applies to those nonfinancial assets and liabilities affected by the one-year
delay. The adoption of SFAS 157 did not have a material impact on our financial statements.
SFAS 157 establishes a hierarchal disclosure framework that prioritizes and ranks the level of
market price observability used in measuring assets and liabilities at fair value. Market price
observability is impacted by a number of factors, including the type of asset or liability and
their characteristics. Assets and liabilities with readily available active quoted prices or
for which fair value can be measured from actively quoted prices generally will have a higher
degree of market price observability and a lesser degree of judgment used in measuring fair
value.
 The three levels are defined as follows:
 
    
    Level 1  inputs to the valuation methodology are unadjusted quoted prices for
identical assets or liabilities in active markets.
 
    
    Level 2  inputs to the valuation methodology include quoted prices for similar
assets and liabilities in active markets, and inputs that are observable for the asset
or liability, either directly or indirectly, for substantially the full term of the
financial instrument.
 
    
    Level 3  inputs to the valuation methodology are observable and significant to the
fair value measurement.
  13




---



##### Table of Contents



We evaluated our assets and liabilities to determine which items should be disclosed according
to SFAS 157. We currently measure our derivative contracts on a recurring basis at fair value.
The inputs included in the fair value measurement of our derivative contracts use adjusted
quoted prices from an active market which are classified at level 2 as a significant other
observable input in the disclosure hierarchy framework.
 The following table summarizes the valuation of our assets and liabilities in accordance with
SFAS 157 fair value hierarchy levels as of June 30, 2008:
 Quoted Market
    
    
    Significant Other
    
    
    SignificantPrices in Active
    
    
    Observable
    
    
    UnobservableMarkets
    
    
    Inputs
    
    
    Inputs(in thousands)
    
    (Level 1)
    
    
    (Level 2)
    
    
    (Level 3)AssetsDerivative contracts
    
    $
    
    
    
    $
    42,425
    
    
    $
    Total
    
    $
    
    
    
    $
    42,425
    
    
    $
    LiabilitiesDerivative contracts
    
    $
    
    
    
    $
    (5,503
    )
    
    $
    Total
    
    $
    
    
    
    $
    (5,503
    )
    
    $
    
 7.
    
    Revolving Credit Facility
 We have a $50.0 million revolving credit facility available that expires January 31, 2012. The
revolving credit facility bears interest at a variable rate plus a margin (London Interbank
Offer Rate (LIBOR) plus 175 basis points, or 4.22% at June 30, 2008). Under the credit
facility, we may borrow an amount generally based on eligible cash balances, 85% of eligible
accounts receivable and 60% of eligible finished goods inventory, less outstanding letters of
credit. Our borrowings under the credit facility are secured by substantially all of our
working capital. The agreement also requires us to adhere to certain limitations on additional
debt, capital expenditures, acquisitions, liens, asset sales, investments, prepayments of
subordinated indebtedness, changes in lines of business and transactions with affiliates. At
June 30, 2008, we had $50.0 million of borrowing availability and there were no outstanding
borrowings or letters of credit under the facility.
 8.
    
    New Accounting Pronouncements
 In December 2007, the Financial Accounting Standards Board (FASB) issued Statement of Financial
Accounting Standards (SFAS) 141R, Business Combination,which changes how business acquisitions
are accounted. SFAS 141R requires the acquiring entity in a business combination to recognize
all (and only) the assets acquired and liabilities assumed in the transaction and establishes
the acquisition-date fair value as the measurement objective for all assets acquired and
liabilities assumed in a business combination. Certain provisions of this Standard will, among
other things, impact the determination of acquisition-date fair value of consideration paid in
a business combination (including contingent consideration); exclude transaction costs from
acquisition accounting; and change accounting practices for acquired contingencies,
acquisition-related restructuring costs, in-process research and development, indemnification
assets, and tax benefits. SFAS 141R is effective for business combinations and adjustments to
an acquired entitys deferred tax asset and liability balances occurring after December 31,
2008. We are currently evaluating the future impacts and disclosures of SFAS 141R.
  14




---



##### Table of Contents



In December 2007, the FASB issued SFAS 160, Noncontrolling Interests in Consolidated Financial
Statements,an amendment of ARB No. 51, (SFAS 160). SFAS 160 improves the comparability and
transparency of financial statements when reporting minority interest. Entities with a
noncontrolling interest will be required to clearly identify and present the ownership interest
in the consolidated statement of financial position within equity, but separate from the
parents equity. The amount of consolidated net income attributable to the parent and to the
noncontrolling interest will be identified and presented on the face of the consolidated
statement of income. The statement offers further guidance on changes in ownership interest,
deconsolidation, and required disclosures. The statement is effective for fiscal years and
interim periods within those fiscal years beginning January 1, 2009. We are currently assessing
the impact SFAS 160 may have on our financial statements.
 In March 2008 the FASB issued SFAS 161, Disclosures about Derivative Instruments and Hedging
Activities(SFAS 161). SFAS 161 is an amendment of SFAS 133, Accounting for Derivative
Instruments and Hedging Activities(SFAS 133). To address concerns that the existing
disclosure requirements of SFAS 133 do not provide adequate information, this Statement
requires enhanced disclosures about an entitys derivative and hedging activities and thereby
improves the transparency of financial reporting. This statement shall be effective for
financial statements issued for fiscal years and interim periods beginning after November 15,
2008. We are currently evaluating the future impacts and disclosures of SFAS 161.
 The FASB has issued Draft Abstract Emerging Issues Task Force (EITF) Issue 07-4, Application of
the Two-Class Method under FASB Statement No. 128 to Master Limited Partnerships(EITF 07-4).
EITF 07-4 specifies the treatment of earnings per unit calculations when incentive distribution
rights exist. The issue shall be effective for financial statements issued for fiscal years
and interim periods within those fiscal years beginning January 1, 2009. We are currently
assessing the impact EITF 07-4 may have on our financial statements.
 In May 2008, the FASB issued SFAS 162, The Hierarchy of Generally Accepted Accounting
Principles(SFAS 162). SFAS 162 identifies the sources of accounting principles and the
framework for selecting the principles to be used in the preparation of financial statements of
nongovernmental entities that are presented in conformity with generally accepted accounting
principles (GAAP) in the United States (the GAAP hierarchy). This Statement is effective 60
days following the Security and Exchange Commissions approval of the Public Company Accounting
Oversight Board amendments to Auditing Standards Section 411. We do not expect the adoption of
SFAS 162 to have a material impact on our results of operations or financial condition.
  15




---



##### Table of Contents



ITEM 2.
    
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
 Introduction
    Dependence on Terra Industries
   16




---



##### Table of Contents



Three months ended June 30, 2008 compared with
three months ended June 30, 2007
  2008
    
    
    2007Volumes
    
    
    Unit Price
    
    
    Volumes
    
    
    Unit Price(000 tons)
    
    
    ($/ton)2
    
    
    (000 tons)
    
    
    ($/ton)2Ammonia
    
    
    116
    
    
    $
    555
    
    
    
    95
    
    
    $
    382UAN (32% basis)1
    
    
    521
    
    
    $
    336
    
    
    
    552
    
    
    $
    230
 1.
    
    The nitrogen content of UAN is 32% by weight.2.
    
    After deducting outbound freight costs.    17




---



##### Table of Contents



Six months ended June 30, 2008 compared with
six months ended June 30, 2007
  2008
    
    
    2007Volumes
    
    
    Unit Price
    
    
    Volumes
    
    
    Unit Price(000 tons)
    
    
    ($/ton)2
    
    
    (000 tons)
    
    
    ($/ton)2Ammonia
    
    
    154
    
    
    $
    546
    
    
    
    164
    
    
    $
    371UAN (32% basis)1
    
    
    1,023
    
    
    $
    309
    
    
    
    1,054
    
    
    $
    207
 1.
    
    The nitrogen content of UAN is 32% by weight.2.
    
    After deducting outbound freight costs.   Capital resources and liquidity
      18




---



##### Table of Contents



19




---



##### Table of Contents



Income and Distribution AllocationClass BTarget
    
    
    Target
    
    
    Common
    
    
    Common
    
    
    GeneralLimit
    
    
    Increment
    
    
    Units
    
    
    Units
    
    
    Partner
    
    
    TotalMinimum Quarterly Distribution
    
    $
    0.605
    
    
    
    0.605
    
    
    
    98.990
    %
    
    
    0.985
    %
    
    
    0.025
    %
    
    
    100.000
    %First Target
    
    
    0.715
    
    
    
    0.110
    
    
    
    98.990
    %
    
    
    0.985
    %
    
    
    0.025
    %
    
    
    100.000
    %Second Target
    
    
    0.825
    
    
    
    0.110
    
    
    
    85.859
    %
    
    
    0.985
    %
    
    
    13.156
    %
    
    
    100.000
    %Third Target
    
    
    1.045
    
    
    
    0.220
    
    
    
    75.758
    %
    
    
    0.985
    %
    
    
    23.257
    %
    
    
    100.000
    %Final Target and Beyond
    
    $
    1.045
    
    
    
    
    
    
    
    50.505
    %
    
    
    0.985
    %
    
    
    48.510
    %
    
    
    100.000
    %
      20




---



##### Table of Contents



ITEM 3.
    
    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
   
 ITEM 4. CONTROLS AND PROCEDURES
   FORWARD-LOOKING INFORMATION IS SUBJECT TO RISK AND UNCERTAINTY
   21




---



##### Table of Contents




    
    changes in financial markets,
 
    
    general economic conditions within the agricultural industry,
 
    
    competitive factors and price changes (principally, sales prices of nitrogen products
and natural gas costs),
 
    
    changes in product mix,
 
    
    changes in the seasonality of demand patterns,
 
    
    changes in weather conditions,
 
    
    changes in environmental and other government regulations,
 
    
    changes in agricultural regulations, and
 
    
    other risks detailed in the section entitled Risk Factors.
 Business Managements Discussion and Analysis of Financial Condition and Results of
Operations Notes to our Consolidated Financial Statements
  22




---



##### Table of Contents



PART II. OTHER INFORMATION
 
 ITEM 1. LEGAL PROCEEDINGS
  
 ITEM 1A. RISK FACTORS
  
 ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
  
 ITEM 3. DEFAULTS UPON SENIOR SECURITIES
  
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
  
 ITEM 5. OTHER INFORMATION
   23




---



##### Table of Contents



ITEM 6. EXHIBITS
 (a) Exhibits:
 Exhibits 31.1
    
    Certification of the Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002Exhibits 31.2
    
    Certification of the Vice President and Chief Accounting Officer Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002Exhibit 32
    
    Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
  24




---



##### Table of Contents



SIGNATURE
  TERRA NITROGEN COMPANY, L.P.By:
    
    TERRA NITROGEN GP INC.as General PartnerBy:
    
    /s/ DANIEL D. GREENWELLDaniel D. GreenwellVice President andChief Accounting Officer(Principal Financial Officer)
   25




---



##### Table of Contents



EXHIBIT INDEX
 Exhibit No.
    
    DescriptionExhibits 31.1
    
    Certification of the Chief Executive Officer Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002Exhibits 31.2
    
    Certification of the Vice President and Chief Accounting
Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002Exhibit 32
    
    Certification Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
  26